High-Rent Hangover | Have a Plan for $3.50 Corn, $8.50 Soybeans

All good things come to an end. To prepare for the eventual end of commodity grain glory days, your best move may be to run the numbers through available decision-making tools and evaluate options to reduce high-rent hangovers.

A period from 2006 and ending sometime in the future likely “will be viewed as the 'golden age' for crop farm incomes," says Gary Schnitkey, University of Illinois agricultural economist. Knowing how to respond to $3.50 corn and $8.50 soybeans “will be a worthwhile planning activity," he says. "Building financial reserves now is a good way to be able to withstand those times. The farms particularly vulnerable to price downturns have a percent of their farm base cash rented. Find ways to lower cash rents when periods of low prices are on the horizon."

Schnitkey says current projections place 2012 corn and soybean prices around $5/bu. for corn and $11/bu. for soybeans; substantially below 2010 and 2011 prices. But even with normal yields and no unexpected cost increases, grain farm income could still average around $150,000/farm and make 2012 another good income year.

"On the other hand, further price declines could limit profits and increase financial stress," Schnitkey says. Prices could vary over the next five years, he says, “with a long-run average close to $4.50/bu. for corn and $10.50 for soybeans. That would result in $86,000 net income, much closer to the $66,000 average from 2001 to 2006 than the $177,000 from 2006 to 2010."

Decision-Making Tools

Use available tools to evaluate rents for potentially lower price scenarios, say farm management specialists. For example, the University of Illinois FAST (Farm Analysis Solution Tools) downloadable grain farm budget projection tool calculates per-acre budgets for different crops and a whole farm budget that includes breakevens.

Projected financial statements and return sensitivities are available, and the effects of farm level crop insurance and hedging can be analyzed. The cash rent with bonus worksheet allows you to set parameters of cash rent with bonus leasing arrangements and then calculates cash rents under alternative prices and yields (http://bit.ly/z5mg8d).

For example, the table aboveset with default values shows that for 200-bu. corn, rent values could be $200/acre with $3.50 corn and $512/acre for $7.50 corn. The target cash rent is 30%

of crop revenue. Figures can be changed to fit individual operations.

Similarly, Kansas State University Extension offers an Excel spreadsheet called KSU-lease.xls available through www.AgManager.info. The spreadsheet budgeting program allows farmers to determine equitable crop share and cash lease rental arrangements. Kevin Dhuyvetter, KSU Extension agricultural economist, says the underlying data are crop budgets, which can be tailored for the impact of cash prices, and how prices affect returns at given cash rent levels.

"All farmers really need is a crop budget to look at how prices and rents might impact their bottom line," Dhuyvetter says. "Given the outlook for lower prices in the long run, farmers could move back to crop share arrangements, which won't likely happen, or develop flexible cash leases, although that won't fix leases already in place. None of us know where crop prices are going, and thus establishing fixed cash rents is extremely difficult and risky for both parties."

Steve Johnson, Iowa State University (ISU) farm and ag business field management specialist, agrees that crop price volatility in recent years has made it difficult to use fixed cash rental rates. "Landowners that adapt to flexible cash farm leases receive a guaranteed base cash rent amount, in addition to a flex payment triggered by higher gross revenue (yields and/or price)," he says. "With a decline in crop prices, the potential risk of setting high fixed cash rents becomes a concern. Flexible cash farm leases will likely be fairer to both landowner and tenant.

"The challenge can be determining a base rent amount, maximum cash rent and way to calculate a flex payment," Johnson adds. "Maximum rent tends to be about $100/acre above the pre-established base. Having a maximum rent is a safeguard for a tenant to better figure potential cost of production, calculate breakevens and implement pre-harvest marketing strategies."

ISU has a flexible lease agreement worksheet on its Extension website, http://bit.ly/xgz93i.

Cause for concern

Projected corn demand is strong enough to keep average projected crop prices above pre-2007 levels, says Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri.

The average corn farm price is projected at $5.96 for the current marketing year, and then suggests the average price may hover around the $4.80 mark for the next several years, FAPRI says. But corn prices could be under $3.50 or more than $6/bu. in any given year, the analysis suggests.

FAPRI economists suggest lower crop prices and higher production costs could contribute to a modest reduction in net farm income over the next three years. Actual net farm income will continue to vary because of volatile prices, production and expenses.

"Given current tight corn supplies, the market will be sensitive to news about 2012 supply and demand prospects,” the current FAPRI report says. “After years of rapid growth, ethanol production also is expected to remain fairly stable for the next two years."

Westhoff adds, "Obviously, what someone can afford to pay in rent will be closely tied to crop prices and yields." FAPRI's baseline estimates net returns over variable expenses – the amount left to cover rent and other fixed expenses – and indicates just how uncertain those net returns might be. Market net return per acre estimate for corn producers is $550.88 for the current marketing year, and then drops back to $427.51 for next year.

Net farm income in Illinois for example, reflects today’s robust economy, but also the potential for future declines. Farms enrolled in Illinois Farm Business Farm Management (FBFM), for example, averaged net farm income of $66,000/farm from 2001 through 2006. Net farm income rose to $177,000/farm from 2006 through 2010, and averaged more than $200,000 in 2011.